The Sick Economist's Blog, page 10

HOW DO CLINICAL TRIALS WORK?

How are new drugs created? Whether trying to understand the constant polemic around high drug prices, or aiming to gain a better understanding of your biotech investments, a solid understanding of the drug discovery process is essential. Each new potential compound must pass through a rigorous, standardized testing process before it can ever become lucrative for investors and helpful for patients. Understand the process, understand the path to profit. Biotech Analyst Aidan Asbill explains….

Life-changing medicines have impacted the world, but the path to get there isn’t a simple one. One example of this is Gilead HIV medication, which turned HIV from a death sentence, into a manageable disease. The most recent example of this was the many iterations of  covid-19 vaccines that have been produced and allowed us to return to normalcy. However, for every life-changing medicine, hundreds won’t make it past clinical trials. Clinical trials can make or break many Biomed stocks, with stocks being so speculative based on potential new products in the companies pipeline. These clinical trials also act as a proof of concept showing that these companies’ pipelines are realistic and backed by scientific data and are more than wishful thinking. Clinical research is an expensive, but necessary process in the development of medicine and treatments. Companies spend millions, even going into debt, in order to find the next big drug that can put their company on the map and pay back all that they spent tenfold. Before starting these trials, a company will first have to test its ideas in the lab, in what we call the preclinical stage.

Preclinical

When a drug is in its infancy, it must first be tested in a lab to see if it has a positive influence on treating whatever illness or diseases the drug is seeking to fix. To do this, clinical research starts with testing on cells taken from the human body. After testing for an effective response on the cells it goes on testing on animals and eventually in the next stage humans. The most promising treatments are moved into clinical trials, which are divided into phases, with each phase expanding the test pool to test how safe and viable the treatment is. The purpose of these clinical trials is to find out if the drug is a safe and effective way of treating the patients being tested. Clinical trials are performed on many different volunteers, some healthy and some with illnesses. Procedures on healthy volunteers are meant to develop new research and to help establish a baseline for the drug. This baseline of the healthy people is then compared to the volunteers with illnesses, which helps researchers analyze and refine the drug’s effectiveness. Clinical trials may also be performed as a last-ditch effort on people with severe illness that has no cure. After volunteers are found, the first phase of the clinical trial can begin.

Phase 1

During this first stage, researchers are testing to see if the drug is safe for wider use. In order to test the drug’s safety, this phase will typically consist of 50-100 volunteers who will be given the drug to test its efficiency and to determine if there are any adverse side effects. The researchers then decide if the drug needs to be recalibrated going into the next phase. The goal of Phase 1 is to assess the highest dose humans can take without serious side effects. Researchers will observe participants very closely to see how the patients react to the drug during this part of the trial. While preclinical research usually provides a good idea of the effects of the medication, the effects of the drug during the trial can be unpredictable for the patient. Another thing researchers need to consider is to find the best way to administer the drug, whether that be topically, intravenously, or orally. Not every drug makes it through this phase. According to the FDA, approximately 70 percent will move onto the next phase of clinical trials.

Many companies have an extensive amount of Phase 1 trials in their pipeline, however, AbbVie’s ($ABBV) looks very interesting with its acquisition of  Mitokinin. Mitokinin is a biotech company that has developed a technology to increase the PINK1 compound in our brains, which increases brain activity. However, this may have massive implications as a very effective treatment for Parkinson’s Disease. AbbVie has agreed to buy Mitokinin if they complete the study of their PINK1 compound and its effectiveness against Parkinson’s disease. If the PINK1 compound is proven effective, AbbVie has billions to gain. In 2026, it is estimated that the Parkinson’s disease market could reach $8.38 billion by 2026. With the addition of the PINK1 compound to the company’s already extensive pipeline, AbbVie could be positioned to become a star player in the biotech world.

Phase 2

In phase 2 the clinical trials start to gain traction, but most drugs won’t yield effective enough results to get past this phase. In fact, only 33% of clinical trials conducted will move onto Phase 3. This stage will expand the test pool to involve 100 to 300 patients. This phase will typically take 6 months to a year, in this time researchers will figure out the patient’s conditions and refine the proper dosages. To do this researchers split participants into groups and give each group a different dose. Researchers will even include a placebo to have a control to compare the research to. Doing this, allows researchers to determine which dosage is the most effective and will produce the best results. Another thing researchers have to consider is which dose produces the least amount of side effects. Even though phase 2 includes more volunteers than phase 1, it’s still not nearly ready to enter the market and still has to pass more rigorous FDA approval. However, this information will be invaluable to researchers going into phase 3 of a clinical trial.

A company with a very compelling phase 2 pipeline is Moderna ($MRNA). The company is mostly known for its Covid-19 vaccine, but its mRNA technology can be utilized to treat countless other illnesses. In its phase 2 pipeline, Moderna’s most ambitious project is to make a personalized cancer vaccine (PCV). The PCV will be unique to each patient and will be administered using mRNA, allowing a patient’s immune system to identify antigens. However, making a vaccine that is unique to each person and also identifies antigens in each unique patient seems like a very hard task to accomplish. The company is still in the early stages of testing, but if Moderna is able to accomplish this task, they can change the way cancer is treated forever. Moderna has already proved its mRNA technology with its Covid-19 vaccine, but only time will tell if it can utilize that same technology to help treat cancer.

Phase 3 and beyond

Phase 3 is where the most extensive testing begins to take place. This phase will have a group of hundreds or thousands of volunteers, often divided among many countries around the world. This is where the research is put into action, and proof of concept becomes reality. Be that as it may, proving the product is safe and effective is a very expensive endeavor. In Phase 3 alone, the average cost for a company is between 11.5 million and 52.9 million. After prevalent testing often taking years, the researchers will decide if the drug has proven to be a safe and effective method of treating the disease. If the company has proven that its proof of concept has shown to be an effective and safe method, they will submit a New Drug Application. This NDA will incorporate all the researcher’s findings, as well as all the scientific evidence done during their trials. This NDA will then be submitted to the FDA, where if approved the drug can finally be prescribed to patients as a treatment. After a drug is approved by the FDA, phase 4 of the clinical trial begins. With the drug being available to the public, researchers can monitor its safety on a wider scale and determine more information about the benefits of the drug. Phase 4 is often sometimes used to pull a product, with a recall or pause. This was most recently seen with the company Johnson and Johnson’s covid-19 vaccine, which was found to cause blood clots in some of their patients. 

There are many companies with compelling phase 3 pipelines, but one that stands out is Regeneron’s  ($REGN) Phase 3 trial investigating the PD-1 inhibitor Libtayo monotherapy in cervical cancer patients. If the drug is to gain FDA approval, it may greatly increase the survival rate in those suffering from the disease. In their phase 3 trial of the product, Regeneron found that their product is the first immunotherapy to demonstrate improved overall survival in patients with cervical cancer, reducing the risk of death by 31% compared to chemotherapy. The drug is even more effective with patients with Adenocarcinoma had a 44% reduced risk of death. Approximately 4,000 women die from cervical cancer a year, but Regeneron will aim to drastically reduce this number once their drug is approved.

Clinical trials are an essential process of getting a drug from an idea to the shelves of your local pharmacy. Clinical research is an expensive, but necessary process in the development of medicine and treatments. These trials do not only help qualify the research of the drug, but they also have the potential to change the lives of the volunteers that take place. Patients that take part in successful clinical trials can have their life expectancy greatly increased or even be cured of their illness. As each phase gets more in-depth the odds of a drug moving on to the next phase becomes harder to achieve. However, the drugs that will pass a clinical trial will have the potential to save and alter lives.

 

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MODERNA, INC: 2021 AND BEYOND

By now, you may be aware that Moderna, Inc ($MRNA) has gained global acclaim as the start up that pioneered mRNA technology to produce a powerful Covid vaccine in record time. The share price has responded accordingly, skyrocketing as the company’s new technology went from theory to reality. But now the company faces new challenges; from patent threats to fierce global competition for Covid business, some analysts wonder whether $MRNA is a “one trick pony.”  How will Moderna respond to these new threats to their business? What else do they have in their pipeline? Aidan Asbill, biotech analyst, investigates….

With the appearance of the Covid-19 outbreak, the global economy halted in its tracks. The whole economy was forced to adapt to a new reality with many sectors struggling to stay afloat. However, Covid-19 would become the next gold rush for whoever could produce a safe and effective vaccine. The companies who could successfully create a vaccine stood to make billions, as well as save countless lives. All the big biotech players such as Pfizer and Johnson and Johnson rushed to work on a vaccine. Historically vaccines have taken years to find, but with the stakes being elevated, some companies turned to new research in mRNA. This research had the potential to create a safe and effective vaccine faster. One relatively unknown company was set up to capitalize on the newfound interest in mRNA, this company was Moderna. With the company’s research in mRNA, they were a step ahead to create an effective mRNA-based vaccine. Moderna was a relatively unknown company, but with the creation of their Covid-19 vaccine, the company would go up 434% in 2020 alone. Still, this begs the question, does the company still have room to grow? To figure this out, let’s look at Moderna’s unlikely rise to the top.

Moderna is a relatively young company that was started in 2010. Early on Moderna differentiated itself from other biotech companies with its revolutionary research into synthetic messenger RNA. Moderna explains this technology best by calling their mRNA research the “software of life.” What Moderna sought to do was make precise tweaks to synthetic mRNA that when injected into someone, could allow any cell in the body to transform to fight against rare diseases. In layman’s terms, this means Moderna can inject mRNA into one’s body and decide which proteins the cells produce or do not produce.  This has massive implications, not just for stopping Covid-19, but for treating cancer with a simple shot, or even stopping the number one cause of birth defects in the U.S. Moderna is also led by incredible leadership under their CEO Stéphane Bancel. Bancel is known as a business first CEO, who climbed his way through the ranks as a French CEO. When Bancel entered the company he was able to secure 1 billion in funding. Furthermore, Bancel is a co-inventor of more than 100 early patents is, unusual for a CEO who isn’t a Ph.D. scientist. Bancel’s leadership helped Moderna get a billion in investments before even having clinical trials. Despite this, Bancel knew the risk of a young biotech startup, such as Moderna. In an interview with Advisory Board President Eric Larsen, when asked about his move to Moderna, Bancel responded, “When I resigned from my last company, bioMérieux, to start on this journey at Moderna, I told my wife there was only a 5% chance it would work out. He went on further to state, “But it was very clear that, if we could make drugs in this new modality, it would change medicine forever. In March 2020, Bancel and his company would get their chance to change medicine forever, with the Covid-19 outbreak.

Modernas Competition and Obstacles

Besides having a great leader in Bancel, some credit also has to go to the very impressive team around him. While every biotech company in the world was racing to make a covid-19 vaccine, Moderna was able to design their mRNA Covid-19 vaccine in just 2 days. The team was able to do this without even using a sample of the physical virus. Like many young companies, Moderna was not profitable until recently. The company lost 514 million in 2019 until Covid struck which positioned the company’s unlikely rise. Since then, the company has raised 5 billion of cash on hand and has increased revenue every quarter. When looking at valuation Moderna trades at 8.1 times earnings expected over the next 12 months. While this figure is high its other competition also trades at a premium. Novavax trades at 8.6 times expected earnings, Biogen trades at 14.3 times and Regeneron trades at 11.1 times.

When looking at Moderna’s competitors, it is clear that Pfizer has a clear head start against Moderna. Pfizer is a massive company with revenue of 41 billion last year, while Moderna made just under a billion. This has allowed Pfizer to get bigger deals, such as securing the biggest deal yet for 1.8 billion more Pfizer vaccine in Europe. Europe will still utilize Moderna vaccines but Moderna will have to focus its efforts elsewhere to secure bigger deals. Pfizer is also set to make 3 billion vaccines by 2022, while Moderna is only set to make 1 billion. However, in a world of nearly 8 billion people and 2 shots being needed, Moderna still has a massive opportunity to distribute billions of vaccines across the globe. One key competitive advantage Moderna has against Pfizer, is that the Moderna vaccine is able to be stored at warmer temperatures. The Pfizer vaccine has very strict temperature requirements, which require expensive refrigeration equipment to store it. For some less privileged countries, this may not be a viable option. Countries like India, Brazil, and Indonesia are all countries where Moderna could become the preferred vaccine of choice. Moderna has done a good job targeting these markets by securing a new deal that they announced on May 3rd in a press release. The company announced that it had reached an agreement to supply up to 500 million doses of its vaccine to Gavi, the Vaccine Alliance, an organization that works to improve access to vaccines in the world’s poorest countries. This is a great sign for Moderna playing to their strengths and proving they can still find new markets for growth, despite plummeting demand for vaccines in the U.S and Europe.

Pipeline

Moderna isn’t limited to just its Covid vaccines, the company’s future looks very bright with its array of vaccines in the company’s pipeline. Cytomegalovirus is the number one cause of birth defects in the United States infecting approximately 25,000 newborns a year in the U.S alone. About 20% of these infected infants will experience disabilities such as hearing loss, vision impairment, decreased muscle strength, and more. Moderna is looking to solve this with their CMV vaccine, which seeks to stimulate a strong antibody response against the virus that causes birth defects. Modernas CMV vaccine is expected to enter phase 3 in 2021, where they will test 8,000 participants across the globe. In addition, Moderna is also in Phase 2 of their PCV vaccine, which will help to treat and cure cancer by enhancing the body’s response to tumors. The PCV vaccine will safely expose the patient’s immune system to tumor antigens in order to help the body induce an immune system response. In an April 14th press release, the company also announced plans for its  Phase 1 mRNA flu vaccine, as well as a Phase 1 study evaluating HIV vaccines. Modernas is taking one novel approach that will broadly neutralize HIV antibodies. The Phase 1 study will expand upon a previous HIV vaccine, which had promising results but has yet to be tested on humans. Moderna is aiming to make a more efficient flu shot, that will be 90% effective compared to 40-60% effectiveness of traditional flu shots. The flu shot is approximately an 11 billion per year market and that’s just in the U.S. With the companies intriguing pipeline, the company is set up very well for the years to come.

With the recent announcement, that the United States will be advocating to waive Covid-19 vaccine patents, this would allow other countries to mimic Modernas and other Covid vaccines. Patents are extremely important in the biotech industry for long-term revenue growth. To make matters worse, countries like India, where Moderna may have an advantage, could produce mimic patents similar to the Moderna Vaccine. This could force Moderna to sell at a heavy discount, to compete in these markets that produce their own vaccines. There is also a negative stigma developing around Moderna that it has worse side effects than its competitor Pfizer. According to Pfizer, 3.8% of their trial participants had fatigue symptoms and 2% had head pains. Moderna numbers are slightly higher with 9.7% of participants feeling fatigued and 4.5% having headache symptoms. Although these symptoms are very minor, some consumers may go out of the Pfizer shot, over the Moderna shot, due to the harsher symptoms. This is made worse by the growing skepticism surrounding the Covid-19 in the U.S. From here, it is clear, that Pfizer has a clear edge over Moderna in the U.S and Europe. With that being said, it’s a natural assumption that Moderna will have the most success selling to different markets, however, with the patents being lifted this could prove to be a difficult task for Moderna.

Should you buy the stock?

The company had 5.2 billion in cash on hand at the end of last year which sets the company up amazingly to invest in production for more Covid-19 doses, as well as further investment in new mRNA products. One of these new products that they are working towards is a booster shot that would combine their Covid-19 vaccine with a flu shot. The booster shots are set to come out in 2023 to help stop future strains of Covid-19. In 2017, only 37.1% of adults got a yearly flu shot, down from 43.6% in 2014. However, after the Covid-19 outbreak, yearly flu shots should skyrocket, as people become more health-conscious. If Moderna is able to administrator their booster shots yearly, the company is positioned for a very bright future. When looking at earnings it’s not a new phenom that the stock price of Moderna and other biotech stocks fall after earnings. This was especially unfortunate this time because their earnings were slightly missed and the news of the Biden administration’s support of removing Covid-19 patents caused the stock price to tank 10% on the news. However, the stock has been already recovering from post announcement lows, despite the market, in general, having a setback. With the Covid-19 outbreak, Moderna secured itself as the market leader of mRNA research. Moderna is set to have a breakout in 2021 and 2022, but its long-term growth comes down to if you trust its leadership and the company’s ability to pioneer future mRNA vaccines. 

 

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WHAT ARE PBMs, AND ARE THEY GOOD INVESTMENTS?

The journey of a pharmaceutical from the factory to your body can be filled with twists and turns. Indeed the American healthcare system has been criticized as convoluted, opaque and expensive.  Here at Sick Economics, we believe that knowledge is power. So we asked our Healthcare Analyst Dabin Im to demystify the forces that control price and supply of medicine in America. Our goal? First to help you understand the forces that drive the pharmaceutical business; second to help you profit from those forces….

What is a Pharmacy Benefit Manager?

Pharmacy benefit managers, PBMs, play an essential role in healthcare. They form contracts with the key players in the pharmaceutical supply chain, from drug manufacturers and insurance companies to retail pharmacies. When PBMs were first established, their initial purpose was to save time for insurance companies by processing patients’ prescription medications on their behalf. PBMs quickly realized that they could expand their business. Now, they also help patients achieve their health goals and control their medication cost. 

PBMs provide a wide variety of services. One of these include mail-order pharmacy. After a pharmacist verifies the prescription, automated machines package and label the prescriptions, which are then delivered to patients’ homes. This is beneficial for patients who have lifelong diseases and have limited access to transportation. PBMs also develop their own formularies, which are lists of drugs covered by health insurance. Formularies determine how much patients are going to pay for which medications depending on their insurance plan. In other words, PBMs determine which medications patients should take by limiting their options. Physicians are likely to prescribe medications that are on the formulary because they are the most affordable, even though it may not be the best medication for the patient. Is it ideal? No, but the price tag is important. 

One of the main duties of pharmacy benefit managers is to form contracts with pharmaceutical companies. Because PBMs serve over 266 million Americans, they have superior purchasing power and can get bulk discounts like you do at Costco. Drug manufacturers give PBMs a rebate, which is a certain percentage of the drug costs, for having their medications listed on the formulary. It is a win-win. PBMs get a discount, and the drug manufacturer gets to sell more drugs by having their drugs on the formulary. Rebates serve as an incentive for PBMs to list one manufacturer’s drug over that of another manufacturer. PBMs also may lean towards putting the more expensive drug on their formulary because a higher rebate means a higher profit. 

PBMs claim to pass on these savings to patients, helping them afford medications. But is that really true? If so, then why are drugs getting more and more expensive? A study that looked at the relationship between changes in drug price and patient expenses cleared up some of this confusion. For patients that pay prescription co-pays (fixed fees), their out-of-pocket costs did not increase when the drug prices increased. However, it was different for patients that pay deductibles, which is the amount that the patient is responsible for paying before the insurance company chips in. For this patient population, increasing drug costs resulted in a 15% increase of their out-of-pocket expenses from January 2015 to December 2017. Drug manufacturers and PBMs do not reveal the amount of rebates that are given, so it may be unfair to jump to conclusions. However, when the study put the two and two together, there was no evidence that PBMs passed on these rebates to help patients afford their medications. In fact, as shown here, prescription drugs are expected to get even more expensive.

Besides forming contracts with pharmaceutical manufacturers, PBMs also form contracts with independent and chain pharmacies. The pharmacy dispenses the drug, and in return, receives reimbursement from the PBMs for the drug and for dispensing it.  Lastly, PBMs work with variety of health plans, including commercial health insurance, self-insured employers, Medicaid, and Medicare Part D to manage drug benefit plans on their behalf. 

So, you might be wondering, how does a PBM affect me? Well, it would not be an exaggeration to state that they determine the cost of medications. It’s not the pharmacist that tells you how much you have to pay for the medication. It’s the PBM, and the pharmacist is just the messenger.

Generally, PBMs have three streams of revenue: administrative fees from various health plans, rebates from drug manufacturers, and pharmacy ‘spreads’ – the difference between what health insurance pays PBMs and what PBMs pay pharmacies for the drugs. PBMs have been gaining attention due to the lack of transparency in their practices and continuously rising prescription drug prices. This controversy even led to a Supreme Court hearing with Arkansas in the efforts of regulating PBMs. However, there are a few reasons why PBMs will most likely never go out of business. In fact, the PBM market size in the U.S. is expected to exceed $700 billion in revenues by 2025.

1. PBMs have full access to all of their patients’ data, which could be used to tremendously improve patient outcomes. PBMs have a coherent database that contains patient information, such as medical history, medication adherence rates, and doctor visits. Using this data, the PBM can help provide patient-specific digital solutions to improve their overall health. For example, Express Scripts has a mobile app where patients can easily access their medication list, order refills for home delivery, set up dose reminders, and make payments. These features increase medication adherence rates and save patients multiple trips to the pharmacy. In addition, PBMs have an opportunity to make therapeutic recommendations based on patient-specific health factors.

2. The rapid growth in specialty drugs for rare disease states will increase the demand of PBMs. There is great excitement with all the innovative immunotherapies, gene therapies, and cancer drugs that will save lives. However, their price tags will not be as exciting to say the least. PBMs’ purchasing power is needed to negotiate prices with drug manufacturers. Additionally, the expansion of specialty pharmacy will accelerate in the coming years. Life-changing specialty drugs will enter the marketplace for patients with rare diseases, for which medications are not currently available. Specialty pharmacies work with PBMs to offer a full range of patient-centered clinical services to enhance the safety, quality and affordability of care.

3. The PBM business model will shift from fee-for-service to value-based care. This new model incentivizes retail pharmacies and drug manufacturers. It holds them accountable for the quality of their products and services. For example, a PBM negotiates a certain drug price with the drug manufacturer on the insurance plan’s behalf. If it leads to expected outcomes, such as improvement in the patient’s condition, then the health plan will pay the negotiated price. However, if the patient has unexpected serious side effects, then the drug manufacturer will have to pay the price. Therefore, it leads to a more reasonable pricing approach and a broader selection of formularies. It also promotes patient-specific care by preventing overprescribing and wasting medications.

 

3 PBM Stocks to Look Out For 

Three PBM have great control as they make up about 77% of the market share in 2020. That means that 77% of prescriptions in the United States were processed by only three PBMs. Because these three PBMs already have so much control over the market, it is highly unlikely that another PBM would come close. The three PBM stocks to watch for are CVS Caremark, Express Scripts, and OptumRx. They are like the Verizon, T-Mobile, and AT&T of wireless service providers.

CVS Caremark – under CVS Health (NYSE:CVS)

Most people think of CVS as a nationwide community pharmacy chain. However, it has many other subsidiaries. Here is a timeline of CVS Health’s acquisitions that make up what it is today. 

2006: CVS acquired MinuteClinic, which is an affordable walk-in medical clinic that provides services, such as treatment for uncomplicated illnesses and preventative care. 

2007: CVS merged with Caremark Rx, which is a PBM, and formed CVS Health. 

2015: CVS bought Omnicare, which provides pharmacy services in the long-term care setting for seniors.

2018: CVS acquired Aetna, which is an enormous health insurance company.  

CVS Health is one of the biggest healthcare companies that owns a pharmacy chain, a PBM, an insurance company, and a long-term care company. It is exciting to see what CVS will acquire next. The possibilities seem endless to say the least.

Express Scripts – under Cigna (NASDAQ:CI)

In 2018, Cigna, a global health service provider, acquired Express Scripts, a PBM. Express Scripts not only serves as a PBM in the United States but also in Canada. It focuses on providing digital care, such as telemedicine. Cigna acquired MDLive, which is a telehealth platform where doctors are on call 24 hours virtually, which is convenient and more affordable for patients. MDLive provides urgent care, behavior health therapy, dermatology, and wellness screenings. 

OptumRx – under UnitedHealth Group (NYSE:UNH)

UnitedHealth is an insurance company that has two subsidiaries: OptumRx and BriovaRx. OptumRx is a PBM that also has medication home delivery services. BriovaRx is a specialty pharmacy that handles drugs that are very high cost and complex for complicated diseases. OptumRx bought Catamaran Corporation, which was the fourth largest PBM at the time. Their merge has been a huge stepping-stone for UnitedHealth Group. 

Bonus: Humana (NYSE: HUM)

Although the top 3 PBMs are most likely going to keep their ranks, there is another PBM on the rise. Humana is one of the biggest insurance companies in the U.S. that has its own PBM called Humana Pharmacy Solutions. Humana has various subsidiaries, such as Humana Military (administers prescriptions for TRICARE), Humana Pharmacy (provides prescription mail-order service), and SeniorBridge (provides in-home care and caregiving services for seniors). It adopted value-based care, which focuses on quality over quantity.

What makes Humana unique is that it heavily focuses on preventative care. Through its Go365 Wellness Program, members are rewarded for taking care of their health by following recommendations, such as regular exercise, flu shots, and getting the recommended health screenings. Its goal is to prevent and reduce future healthcare costs such as surgery and hospitalization before it’s too late.

What about Amazon? 

Amazon has been gaining attention in the healthcare industry since it acquired PillPack, which is an online pharmacy. Because Amazon also owns Whole Foods Market, some speculate that Whole Foods could even have its own retail pharmacy inside. However, Amazon does not have its own PBM… at least not yet. Instead, PillPack has partnerships with multiple PBMs that help manage its prescriptions.

Next Steps

Now that you know what PBMs are, what they do, and why they are gaining attention, it is now your time to make a decision on whether it is worth your investment. No one can predict the future of PBMs, but one thing remains certain. They have expanded their role in healthcare so much that they are most likely not going away. 

 

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INNOVATION ON SALE: 3 DISCOUNTED GENE EDITING STOCKS

Wall Street is a fickle lover indeed. One day you are the darling of analysts, pundits and investors, and the next day Wall Street’s roving eye has moved on to the next hot young technology. 

Just yesterday, gene editing stocks were all the rage; they enjoyed soaring share prices despite no profits and little revenue to speak of. But lately these shares have sold off. The three leading names in the burgeoning field of gene editing are all at least 30% off their peak. Is this a good time to buy some innovation on sale, or have these companies sold off for a reason? Let’s take a look at Crispr Therapeutics ($CRSP), Editas Medicine ($EDIT)  and Bluebird Bio ($BLUE) to determine which represents the best value. 

1) CRISPR Therapeutics ($CRSP) 

This company has the biggest name in the new world of gene editing. One of the company’s founders is Dr. Emmanuelle Charpentier, a European scientist renowned as one of the mothers of the CRISPR gene editing technology. The largest single shareholder is Cathie Wood’s Ark Investment Management, which typically acts as a relentless cheerleader for portfolio companies. 

Lastly, the company is the best known amongst the gene editing disruptors because of, well, the name. They were founded by an inventor of the CRISPR technology, they have CRISPR in their name and stock ticker, and their research is dedicated exclusively to uses of the CRISPR Cas9 technology. This is a powerful branding posture. Type in the acronym “CRISPR” to Google and you will pull up thousands of articles and videos explaining and extolling this important technological breakthrough. This means that anyone with a dollar to invest in biotech knows about CRISPR Therapeutics. 

The company doesn’t just talk the talk; it also walks the walk. Their efforts could broadly be divided into two different categories; cures for blood diseases such as sickle cell anemia and Beta Thalysisma, and treatments for cancer which leverage CRISPR to enhance the human immune system. They are making great progress on both fronts, with a total of five different therapies now in phase I or II testing on human test subjects in the clinic. They also have a variety of other applications for their technology brewing in the preclinical stage. 

Early clinical results have been very positive. Safety concerns have been few, and initial studies have confirmed that CRISPR gene editing has the ability to make permanent, positive changes to defective human bodies. Although the company may still be years away from revenue (they have zero agents in phase 3 studies), their status as a media darling has enabled them to raise a massive war chest. As of year end, 2020, they had roughly $1.6 Billion in the bank. That same year they burned about $230 Million in cash. So, time is on CRISPR’s side. They can continue to advance their platform for at least five years before having to worry about prosaic concerns like profitability. 

On top of this promising scenario, some of the hot air has come out of the shares of late. The shares are down about 30% since January of this year. Why? 

Sometimes there is no reason. The company has announced little other than positive news. However, as we will see, the whole sector has lost some of its appeal as the financial media has moved onto it’s next shiny plaything. As Covid vaccination has taken off, and our nation’s economic prospects have improved, many investors have chosen to move their money into cyclical stocks. The idea is that these cyclical “reopening” stocks will see immediate improvement in metrics over the next 12 months as we put Covid behind us. Companies like $CRSP, while clearly demonstrating enormous potential, require some patience. Profit is years away. If there is one thing stock investors are not known for, it’s patience. 

So, a cutting edge biotech with big name recognition, a growing pipeline, and rock solid funding. It must be a buy, right?  Maybe.

Valuation is a concern. Even having fallen 30% in just three months, $CRISP still has a market capitalization above $9,000,000,000. That is awfully high for a company with no profit, little revenue, and no prospect of an approved product for at least a few years. One blockbuster drug can easily equate to $1 or $2 Billion in annual sales. With a valuation of $9 Billion, CRISPR Therapeutics is at best fairly valued. $CRISP could currently be valued as highly as 6 or 7 times potential revenue. That’s an awfully high multiple for a “maybe.” Investors really are paying for the big name. Value shoppers may prefer other options. 

2) EDITAS ($EDIT) 

Editas could be the value play that investors are looking for. If CRISPR Therapeutics is in good shape with two therapeutic areas advancing rapidly, then Editas is in better shape with three specialties. Like their rival, Editas is advancing programs for genetic blood diseases and also pioneering new approaches to cancer. These are what Editas has termed “Ex-Vivo” therapies. In other words, gene editing is used in the lab to create medicines that will be introduced to the human body. 

What differentiates Editas from CRISPR Therapeutics is it’s ocular disease program. Editas is aiming to cure a series or rare, but tragic, genetic abnormalities that have caused incurable blindness up until now. This line of research is termed “En Vivo,” in other words, Editas is using gene therapy to make edits directly within the genome of living human beings. The idea is to fix the broken DNA that causes genetic blindness.

In order to advance this three pronged portfolio, $EDIT is leveraging a more broad range of CRISPR Technology. While CRISPR Therapeutics focuses mostly on a kind of CRISPR known as Cas9, EDITAS uses both Cas9, and an alternative approach known as Cas12A. The science related to CRISPR is so new that it’s still not fully settled who owns what, and who owes what to whom.  By diversifying their scientific approach, Editas Management feels that they are limiting risk for shareholders. 

Three recent developments bolster the investment case for Editas. The first is new leadership. The chairman of Editas, James C Mullen, recently took over day to day leadership as the CEO. Mullin has a long track record of elevating non-profitable, pioneering ventures into the big leagues of biotech money makers. As he is transitioning from Chairman to CEO, he is no stranger to the challenges and opportunities that face the young company. This is a highly accomplished, experienced biotech executive who got a taste of Editas, and wanted more. That’s a good sign. 

The second event that bodes well is that the company recently had no trouble at all bolstering its cash stockpile. In early 2021 EDITAS raised an extra $250 Million to bring it’s warchest to $750,000,000. The company burned $179 Million in cash in 2020, so as of the publication of this post Mullen and his team could focus on development of the platform for at least four years without having to worry about running out of cash. 

Despite all of this good news, the share price has also lost steam lately. The shares have sunk by 40% since December, 2020. This leaves the company with a market capitalization of $3.2 Billion. 

Editas has three areas of advancing research while CRISPR only has two. Editas uses two different gene editing technologies, while CRISPR has bet everything on just one tool. Both companies have rock solid funding in place and respected leadership and founders (famous biologist George Church is an Editas founder).  But CRISPR Therapeutics has the brand name and the hard to forget stock ticker. $CRSP has a market cap almost three times that of $EDIT, even though EDITAS seems to offer more to investors. This shows us the power of branding. If you are a Costco shopper, someone who values quality and low price over brand, EDITAS may be a good investment for you. 

3) BLUEBIRD BIO ($BLUE) 

If you have a taste for value, and a strong tolerance for risk, then you might be an ideal shareholder for Bluebird Bio. Bluebird shares have traded as high as $200, but today trade for just $29. Although the company is pursuing the same basic science as CRISPR and Editas, it’s history is unique, and management has recently decided on a bold plan that could set it apart from its competitors. 

Bluebird went public all the way back in 2013, in the earliest days of the gene editing wave. As an early leader in the space, the company benefited from a lot of hype that caused shares to octuple soon after it’s IPO. Bluebird’s bold plan to “recode the story” captured the media’s imagination, and soon the shares were sizzling hot. 

Although the company has made steady progress since those early days, the shares have gone from sizzling hot, to not. The company has confronted a series of setbacks and disappointments, from problems with manufacturing quality, to delays caused by Covid, to, most lately, a cancer scare. 

These trials and tribulations have scared away all but the most hearty of shareholders. The media hype machine that initially caused shares to skyrocket has now been just as brutal in pushing the shares to punishing lows. While the company has been hit with real challenges, many veteran biotech investors would consider this par for this course for any company that dares to pioneer all new science. If it seems like altering the very source code of life has turned out to be difficult, that is because it is. And yet Bluebird continues to make progress. They have at least six programs that are in advanced testing, and they actually have one drug, Zynteglo, which is approved in Europe.  

The launch of Zynteglo has been delayed due to Covid. However prior to Covid, the drug was approved at a price of 1.575 million Euros ($1.867 million), the second most expensive drug of all time. The gene therapy would represent a cure for a rare blood condition called Beta-Thalassemia; a disease which currently requires life long blood transfusions and typically burdons patients with poor health outcomes. 

The drug was to be billed in installments of 315,000 Euros, with payment only required if the gene treatment kept working. This entire “pay for performance” structure is a revolutionary arrangement in the world of medicines, and represented a huge milestone for Bluebird. (As many have noted, wrestling high payment from the European Union’s socialized medical systems is far from easy).  Whenever Covid ends, there is no reason to believe that Zynteglo can’t be a success. 

Bluebird will have to be one tough little creature to fight through the natural roadblocks to innovation. However, $BLUE may well have the resources to persevere. Despite everything, the company still has $1,200,000,000 in cash on the books, and no debt. 

Bluebird also has a plan. It was recently announced that the company will split into two. One new company will specialize in rare diseases (such as Beta Thalassemia and Sickle Cell) and another company will specialize in using gene editing to create cancer treatments.  The company’s current CEO will become the CEO of the cancer focused entity. 

This approach is actually the opposite of what rivals CRISPR and Editas are doing. There is no doubt that $BLUE’s currently anemic share price is playing a role in this decision. If the two units split apart at roughly equal values, then the cancer company will be born with just a $1Billion valuation. I say just because many of it’s cancer rivals with pipelines in similar states of development trade for $4, $5, or even $6 billion. A lot of veteran biotech observers would guess that the company’s well publicized setbacks in the rare disease field have overshadowed the true clinical and financial opportunity on the oncology side. Investors who buy now may well be getting a BOGO deal on the most important biotechnology of the 21st century. 

Gene editing technology is exciting, controversial, and real. The most important accomplishment of the three companies is to demonstrate with verifiable clinical results that we can make real changes to the human body simply by changing our genetic blueprints. We can go from treating symptoms to treating causes. 

CRISPR, Editas and Bluebird took a technology that seemed like science fiction and proved that it’s very real, and here to stay. The bold investor with staying power may just be able to score a deal on these shares today.

 

The Sick Economist Owns Shares in $EDIT and $BLUE 

The post INNOVATION ON SALE: 3 DISCOUNTED GENE EDITING STOCKS appeared first on Sick Economics.

MESOBLAST LIMITED: THE SAGA CONTINUES

It’s been a swashbuckling tale of biotech adventure. Management and investors in Mesoblast Limited have gone to hell and back in a bold quest to pioneer cell based inflammation therapies. Time and time again the company has announced exhilarating breakthroughs, only to suffer disappointing setbacks. Lately, Mesoblast has taken the biotech drama to the next level. Although this small innovator is not for the faint of heart, the latest twist in the company’s Odyssey may just be the most exciting development yet….

Founded all the way back in 2004, Mesoblast is an Australian company, listed on the Nasdaq stock exchange, that has never gotten a product approved by the FDA. The company is on the cusp of gaining approval in several key indications, but so far, investors have endured 16 years of trials and tribulations before any meaningful revenue has blossomed. 

A big part of the reason why the road has been so long and tortuous for Mesoblast is because they insist on doing things the right way. By now it’s very likely you have heard about stem cells, and the enormous therapeutic potential they offer. You may have even heard of people in your community receiving stem cell treatments. Most of the treatments currently offered on a local basis are NOT FDA approved, and have very little scientific evidence behind them. Many of the “solutions” currently offered for large cash payments in orthopedic offices are simply cells that are extracted from your own body, processed in some vague, opaque way, and reinjected right back into you for a large fee. The fact that the materials come from your own body have allowed thousands of unscrupulous practitioners to earn huge profits while ignoring the norms of the scientific community. 

While Mesolblast is also trying to offer solutions based on stem cell biology, the similarities to orthopedic chicanery end there. The company describes the science behind it’s offerings: 

Mesoblast’s novel allogeneic product candidates are based on rare (approximately 1:100,000 in bone marrow)  mesenchymal lineage cells that respond to tissue damage, secreting mediators that promote tissue repair and modulate immune responses.

Mesenchymal lineage cells are collected from the bone marrow of healthy adult donors and proprietary processes are utilized to expand them to a uniform, well characterized, and highly reproducible cell population. This enables manufacturing at industrial scale for commercial purposes. Another key feature of Mesoblast’s cells is they can be administered to patients without the need for donor–recipient matching or recipient immune suppression.

Mesoblast’s approach to product development is to ensure rigorous scientific investigations are performed with well-characterized cell populations in order to understand mechanisms of action for each potential indication. Extensive preclinical translational studies guide clinical trials that are structured to meet stringent safety and efficacy criteria set by international regulatory agencies. All trials are conducted under the continuing review of independent Data Safety Monitoring Boards comprised of independent medical experts and statisticians. These safeguards are intended to ensure the integrity and reproducibility of results, and to ensure that outcomes observed are scientifically reliable.

The company has invested hundreds of millions of dollars and sixteen years striving to produce scientifically accepted, FDA approved products that fight inflation in the body. 

During this time, they have produced thousands of patents, and a number of products are almost approved. But it’s been a white knuckle roller coaster ride that would challenge the courage of even the most bold biotech investors.

The Agony and the Ecstasy

The last eighteen months, in particular, have been turbulent for shareholders. On August 14th, 2020, a panel of FDA experts recommended, in a 9-1 vote, approval for Remestemcel-L in pediatric graft vrs host disease. The FDA almost always follows the recommendations of its advisory committees, so the company’s shares  tripled in value almost overnight. Investors were excited at the prospect of MESO finally launching its first product after so many years in development. 

Shortly after, disaster struck. The FDA chose to ignore the advice of it’s own advisory panel, and require one more safety trial before approval of Remestemcel-L. Although highly frustrating, this is understandable in the context of pediatric care. The FDA is always extra cautious on any novel treatment involving children. An experienced biotech investor could see this development as a temporary setback, but Wall Street was less patient; the shares quickly lost half of their value. 

The next gyration in share price came with a hurricane of news surrounding a totally different trial for a totally different indication. On December 15th, 2020, the company released one of the most confusing press releases of the year. Apparently Rexlemestrocel-L, a cardiac related cell product, failed to stop chronic heart failure in a phase III study. However, the cells did seem to dramatically reduce heart attacks and strokes in this very vulnerable patient population. So, here in the same press release, we had a study that indicated both failure and unexpected success. The study design had held out reduction in chronic heart failure as the main endpoint. The medication failed this endpoint. However, a large reduction in heart attacks and strokes was a pleasant, unexpected benefit. 

Investors had a hard time knowing what to make of this news. One one hand, it seemed to open up a whole new world of promise for Rexlemestrocel-L (655,000 Americans died of heart disease last year). But on the other hand, it was still a phase III trial that missed it’s primary endpoint. Could this still be Mesoblast’s first approved product? Management vowed to forge ahead: 

Mesoblast Chief Medical Officer Dr Fred Grossman said: “We expect the mortality benefit observed in this seminal Phase 3 trial will support a potential path for approval of Rexlemestrocel-L in patients with advanced chronic heart failure. We are planning to meet and discuss potential pathways to approval based on mortality reduction with the United States Food and Drug Administration.”

Once again, Wall Street was unimpressed, and the shares continued to lose value. 

2021 began with even more drama. On February 11th, 2021, the company announced outstanding results in it’s phase III trial related to treatment of back pain. This time $MESO nailed it’s intended endpoint: the company presented definitive data indicating dramatic improvements in pain for patients suffering from degenerative disk disease of the spine. The company was also able to demonstrate significant reductions in opioid use related to its anti-inflammatory cell treatments. By almost any standard, it seemed like Mesoblast had finally discovered the Holy Grail; clear, unambiguous evidence of efficacy against a widespread disease with poor current treatment options. 

But Wait, There’s More….

The February announcement was big news to be sure. But $MESO wasn’t done with her surprises. The first surprise was Wall Street’s poor reaction to the good news. Despite the breathless tone of a press release eager to spread good news, the best Wall Street could seem to manage was a “Meh” reaction. The shares barely reacted to the news. 

However, shares did react to yet another bombshell that the company released on February 26. In it’s bi-yearly shareholder report, the company casually mentioned that it was running out of cash, and might not be able to continue as a going concern. In the second half of 2020, the company had burned through $60 million, and now had only $70 million left. 

In the very same press release, the company announced that it had a new investor lined up. The details were vague. This would be the equivalent of your airplane pilot announcing that the plane is running on fumes, but, not to worry, he knows where the nearest airport is, and he can probably land the plane safely there. Probably.  Perhaps the Mesoblast plane would crash and burn, or perhaps not, but the share price certainly continued it’s rapid downward descent. 

Just a few days later, in characteristic $MESO style, management banished the gloom and doom with yet another new announcement: Not only had funding been secured, but Mesoblast was about to enter into a very special new partnership: 

Chief Executive Dr Silviu Itescu said “We are pleased to receive a strategic investment from the principals of SurgCenter Development, one of the largest private operators of ambulatory surgical centers in the US specializing in spine, orthopaedic and total joint procedures. We expect the deep healthcare knowledge and expertise of this investor group will be of great benefit to the company. The network and infrastructure of surgeons and ambulatory centers operated by SurgCenter may provide unique synergies to facilitate development and market access for Rexlemestrocel, if approved, in patients with chronic lower back pain.” Since its inception in 1993, SurgCenter has partnered in over 230 facilities, with a current portfolio of 80 operational facilities, located in over 20 states throughout the US. SurgCenter is an industry leader in the performance of complex spine surgery and outpatient joint replacement, and has partnered with thousands of surgeons over its three-decade history.

Shazam! Mesoblast strikes again. With the plane’s fuel topped up and some very special new passengers aboard, the company is ready to soar to new heights. 

What Matters

If this feels like it is all a lot to digest, it is. The violent swings in this company’s fortunes are enough to give the most experienced investors whiplash. 

But there are a few critical points that stand out. 

First, Mesoblast now has phase III data that supports the approval of it’s products in three different markets (back pain, cardiac and graft vrs host). At least two of the three potential approvals have vast TAM (Total Addressable Market). 

Second, if $MESO can finally get the back pain indication across the goal line, they’re new partnership with Surgcenter Development could mean that sales will rocket out of the gate. These surgery centers tend to cater towards well to do patients who are experiencing a lot of pain. They may well be happy to pay cash for a proven product with FDA approval. If you have ever known anyone suffering from chronic back pain, you will know how bad their current treatment options are. This partnership could be a game changer. 

Third, the cardiac data could open up vast new worlds for Mesoblast. They were originally aiming for a very narrow indication (treatment of patients with heart failure). But they wound up with strong evidence that their allogenic stem cells can prevent heart attacks and strokes. This may change the TAM from a relatively narrow, specialized field (Chronic Heart Failure) to something that could help millions of Americans. A bigger TAM means much bigger potential for the company as a whole. 

All of that being said, this stock is still very risky. With the new investors coming onboard, $MESO now has just enough cash to get approval for back pain and launch the product. If the company has not achieved it’s long elusive first FDA approval within 18 months, the whole thing could go belly up and the patents could be sold for scrap. 

Additionally, Wall Street has become numb to $MESO’s frenetic press releases. The shares actually went down after the latest good news. (SurgCenter drove a hard bargain and bought their shares at a discount from market value, thus diluting current shareholders. Wall Street hates that). 

Lastly, the market as a whole is flying high right at the moment. Even the riskiest biotech ventures are drawing record sums of investment. It was relatively easy for Mesoblast to raise funds on a moment’s notice. Many analysts feel that the current market could suffer an epic meltdown, like in 2001. In that scenario, $MESO may not find it so easy to keep the plane from crashing the next time it runs out of gas. 

Mesoblast is really a company that exemplifies the classic biotech ethos. It’s innovation or bust for this team. If a wild ride is exciting to you, rather than scary, this may be a company for you. As the saying goes, “No guts, no glory.” 

 

Disclosure: The Sick Economist owns shares in $MESO.

The post MESOBLAST LIMITED: THE SAGA CONTINUES appeared first on Sick Economics.

THE CATHIE COLLECTION: 3 LUCRATIVE BIOTECH STOCKS FROM ARK INVEST

She’s a giant of the contemporary investment scene. Her pronouncements move markets, and she has garnered millions of stock market groupies. Cathie Wood, Founder and CEO of Ark Invest, knows about razzle dazzle when it comes to high tech stocks. Her fund holds substantial stakes in some of the most sizzling biotechs on the market. There is a lot of hype for these media darlings. But are they good long term investments? Let’s take a look at a few of Cathie Wood’s top biotech holdings.1) Iovance Biotherapeutics, Inc (IOVA)

Iovance is one of Wood’s more traditional holdings, in that they fit the model of a pre-revenue biotech company boldly challenging a difficult scientific problem with novel solutions. In this case, the problem is solid cancer tumors. The novel solution would be TIL therapy, which stands for Tumor Infiltrating Lymphocytes. The company explains TIL’s like this: 

In the early stages of cancer, the immune system tries to fight cancer by mobilizing special immune cells known as lymphocytes to attack the tumor. Lymphocytes with the capacity to recognize and attack the tumor traffic to, and infiltrate into the tumor. These cells are known as tumor infiltrating lymphocytes (TIL). However, the anti-tumor effect of the TIL is usually short-lived because cancer cells adapt and employ mechanisms to evade detection by TIL, and suppress the anti-tumor immune response through the release of various anti-inflammatory   factors into the local environment.

Iovance has pioneered a process to synthetically supercharge your own TIL’s and turn them into lean, mean cancer busting machines. So far, investors have seen the company’s share price supercharged. ARK Invest has bought more and more shares as the share price has increased. At this point, ARK is the company’s largest shareholder by far. 

This kind of extreme concentration of ownership by a Wall Street player can lead to fears of market manipulation. Is Cathie Wood buying more shares to make them go up? Or is Cathie Wood buying more shares because she sees assets that are growing in value intrinsically, and she wants to own as much as possible of a good thing? 

So far, Iovance has delivered the goods. They currently have four phase II trials in progress, and several more early stage trials in collaboration with prestigious institutions such as MD Anderson Cancer Center and Moffitt Cancer Center. In addition, the young company has already patented 20 different inventions and discoveries related to TILs. As we speak they are building a highly customized factory to produce TIL’s at volume (the proprietary TIL manufacturing process is complicated and highly personalized for each patient). 

It’s still the early innings for IOVA. They are just beginning stage 2 trials now, so definitive results could still be years away. But the preliminary data is already electrifying. In a recent readout of preliminary data from a trial against metastatic melanoma (skin cancer), the novel TIL’s produced an ORR (Overall Response Rate) of 36%, with the anti cancer effect lasting for years on end. This was in a patient population that was very sick; these patients had failed on multiple lines of treatment, and the cancer had already metastasized in three different places in their body. For 36% of the patients in the study, Iovance’s new medicine bought them at least two more years of life. If IOVA can produce similar results against known killers such as Head and Neck Cancer and Lung Cancer, the shares could continue to soar. 

The company is currently valued at around $7 billion. That may seem like a lot for a company that is years away from having a saleable product. But Keytruda, the cancer blockbuster that started off the immunotherapy revolution, is projected to produce $22 billion in sales in 2025 alone. Like Keytruda, Iovance’s TIL’s are aiming to treat a broad range of serious cancers. With such a huge addressable market hungering for advances in oncology treatment, IOVA shares could be a bargain at the current price. 

Cathie Wood’s “look” is part of her television friendly persona. Her hallmark is her big thick glasses that you would expect from a chemistry nerd if the nerd worked in a lab in Brooklyn. It seems like Wood’s vision may be 20/20 on IOVA. 

 

2) Intellia Therapeutics (NTLA) 

Another biotech pushing science towards new horizons is Intellia Therapeutics. Intellia’s claim to fame is that one of its founders, Dr Jennifer Doudna, recently won the Nobel Prize for her pioneering work in the discovery of the CRISPR method of gene editing. 

Along that line, Intellia is attempting to leverage CRISPR gene editing technology to create a wide variety of cutting edge medical cures. 

The key word here is “attempting.”  NTLA is an example of a very early stage biotech that has achieved outsized market capitalization and funding based on it’s celebrity founders and backers. If Iovance could be considered a “baby” of a company with several studies in phase II, then Intellia is just an oversized embryo. As of the writing of this post, NTLA has just one study entering phase I, with a few more hoping to enter phase I in late 2021. 

The company’s approach certainly seems promising. They are following a two pronged strategy. On one side, they are researching “In Vivo” therapies, whereby they directly utilize CRISPR gene editing to cure rare diseases caused by simple genetic abnormalities. As the company describes “In Vivo,” in these cases, CRISPIR is the therapy. 

The second prong of Intellia’s efforts is in “Ex Vivo” therapies, whereby they utilize CRISPR in a lab to create medicines for more common ailments, such as AML (Acute Myeloid Leukemia). Intellia summarizes “Ex Vivo” therapy as, “CRISPR creates the therapy.” 

The science seems promising, but there are a few details that could be cause for concern. 

First, Intellia is a very young company. They are many years away from producing meaningful revenue, let alone profit. They are currently very well funded, having just sold $200 million worth of stock. But it’s a real leap of faith for any investor. 

Second, although the company proudly touts its connection to biotech superstar Dr Doudna, she seems to have no current involvement in the company. She is not listed as a major shareholder, and she doesn’t even have a seat on the board of directors. There could be a lot of good reasons for this, but it’s enough to make an investor wonder. To put it bluntly, “Elvis has left the building.” 

Lastly, ARK Invest owns an awful lot of this company, and has been selling of late. With little revenue on the horizon, there is a possibility that Cathie Wood’s star power and massive capital have an outsized influence on the share price. Since ARK started selling shares a few months ago, NATLA’s share price has begun drifting down. And this was with ARK selling less than 10% of its stake in the company. What if Cathie Wood suddenly goes cold on the company? Would you want to be left holding the bag in the event that Cathie “leaves the building?” 

Intellia might not be a bad risk to take for an investor who really believes in the future of CRISPR. But it will be a long and winding road for any investor who dares to make the bet. 

 

3) Invitae Corporation (NVTA) 

Invitae is a Silicon Valley “story stock” at it’s finest. The shares have skyrocketed based on a compelling narrative and huge revenue growth. However that huge revenue growth has been accompanied by even more gigantic losses. Both the scientific data and the business rationale behind this company are fuzzy at best. The one thing that is clear is that Invitate is great at incinerating money. 

NVTA is a different kind of healthcare company than the prior two we discussed. IOVA and NTLA could be considered traditional biotech companies, in that they must present a very high level of scientific proof in order to earn revenue; they plan on following traditional pathways for drug approval; data will further be scrutinized by peer reviewed medical journals and, eventually, by insurers who may pay for the medicines. Invitae has bypassed all of this pesky scientific proof by going directly to the consumer. When you go to Invitae.com, you will notice that the copy and images on the site are designed to pitch expensive genetic testing directly to consumers. Invitae talks about their various genetic panels as if the science of genetic testing were as established as the Law of Gravity. These claims are far from reality.  While we are making leaps and bounds in our proven scientific knowledge around genetics, Invitae pushes the envelope right to the boundary between science and science fiction. 

Invitae also has a business selling tests through licensed medical providers. Once again, if you go to Invitae.com, it will be obvious that this is not their core business. However, with some care, you can find a site that purports to be aimed at medical providers. Typically, this is where testing companies provide hard scientific data in peer reviewed journals for educated professionals to review.  Not Invitae. If they do offer peer reviewed publications somewhere, they certainly make it hard to find the data. Who needs good data when you have a great story? 

Whatever Invitae is doing, it’s certainly working (at least from a revenue point of view). According to a presentation delivered on January 12th, 2021 at the J.P. Morgan Healthcare Conference, revenue has grown from under $80 million in 2017 to around $300 million in 2020. A curious investor might like to know: which tests were most popular? How did that revenue break down between physicians and DTC (direct to consumer) what was the average price per test? Too bad. That information wasn’t offered.  

Information that also was not offered during the J.P. Morgan presentation was that losses have grown even more quickly than revenue. According to regulatory filings, in the third quarter of 2020, NVTA brought in $68 million in revenue, but  produced a net loss of $80 million. This is not an anomaly based on Covid. As NVTA has grown revenues, losses have ballooned. 

In it’s most simple form, Invitae is the Uber of medical testing. Management is willfully and blatantly ignoring industry norms and ethical guidelines. The more money they burn, the higher the share price seems to go; they just raised an additional $400 million by selling stock at sky high prices. Just as Uber has burned mountains of cash for more than a decade with no clear path to profit, Invitae seems well on its way to a similar game plan. So far, it’s worked out great for shareholders, especially shareholder #1, who is Cathie Wood. 

As you can probably tell, this kind of business model (or non-business model) has never appealed to me. But Silicon Valley investors have made billions this way. In this case, there are some industry specific risks you should be aware of. 

Right now, we are in the “wild west” of genetic testing. Because it’s not quite a drug, and not quite a device, regulation around the technology is exceedingly weak. Thus, Invitae feels emboldened to claim almost anything with very little hard evidence presented. This can change quickly. With the Democrats now in power, we may see a much stronger wave of regulation sweep through the industry. Additionally, one never knows what kind of whistle blower can emerge with damning accusations. History shows that in the Religion of Wall Street and Silicon Valley, integrity can easily be sacrificed on the altar of never ending growth 

Another big risk is the public’s attitude towards genetic testing. It’s possible that Invitae seems to have no clear path to profitability because they don’t care if they make money off the tests. They may actually be aiming to make money off the health data that they collect. Such data is becoming more and more valuable to health organizations across the world. Collecting and selling this data can be quite controversial, and could blow up in Invitae’s face at any moment.

Invitae may also face sudden privacy concerns. At this point, the media is filled with tales of unintended consequences connected to genetic testing. I personally know someone who accidentally discovered his love child through casual genetic testing. You might imagine that his established family did not love the discovery of this random love child. These kinds of concerns, multiplied times millions, are a risk for Invitae investors.

Finally, there is the risk of shareholder concentration in the form of ARK Invest. ARK is NVTA’s largest shareholder, by far. While this has been great on the way up, it can also mean that the share price would collapse overnight if Cathie Wood decides to sell. Given the ethical grey zone this company is operating in, one shareholder’s outsized influence on share price magnifies the risk. 

If you love perennial money losers with ethical issues such as Uber and Doordash, this stock is for you. If not, stay away.

Cathie Wood and the Ark Invest team certainly know how to thrill investors. Her approach to the stock market could be described as “life in the fast lane.”  The trick is knowing which of her stocks are speeding towards glory, and which are hurling towards a wreck. If you share Cathie’s need for speed, make sure you think through the risk and the reward before you jump in the race. 

 

The post THE CATHIE COLLECTION: 3 LUCRATIVE BIOTECH STOCKS FROM ARK INVEST appeared first on Sick Economics.

COMPUGEN LIMITED: COMPUTERS THAT CURE CANCER?

Compugen Limited ($CGEN) is a growing oncology company that exists at the nexus between information technology and biology. Can the company’s advanced computation become a money machine for investors? 

By The Sick Economist

 

Imagine for a minute that you own the hottest nightclub in town. The ambiance is sheek, you attract top DJs from around the world, and most importantly, the crowd is very select. Everyone has heard about your club, and everyone wants to get in. But not everyone can get in. Why? Because you have a team of security personnel that make sure that only those who belong in your carefully curated ecosystem may enter. Not only are your doormen very selective about who can enter the club, but if they catch anyone misbehaving, they quickly eject the troublemaker. 

But imagine for a moment, that some troublemakers are so pernicious that they come in disguise. Not only can they gain entry into the club, but sometimes they set up residence there and proceed to do all kinds of bad things that hurt the atmosphere; they deal drugs, they harrass women, and they steal liquor. Even worse, if they find the environment friendly to their bad behavior, they invite bad friends, and soon the whole club goes downhill. Your bouncers are constantly scanning the club, looking for those uninvited, out of control troublemakers, but for some reason, they fail at their mission. These troublemakers are so well disguised in your club that they evade security until it’s too late; soon the whole club has been ruined. 

This is basically what happens with cancer. These days we hear so much about our immune systems due to the Covid-19 Pandemic. But did you know that your immune system is also constantly battling cancer? In most healthy people, the immune system is so efficient that tiny malignant growths, sometimes of just a few hundred cells, are removed before any trouble ever begins. But every once in a while a band of malignant cells sets up shop and grows out of control; the immune system is simply helpless against the impending disaster. 

In the last twenty years, it has become abundantly clear that our immune systems play a critical role in the pathology of cancer. That is why drugs like Keytruda and Opdivo, known as immunotherapy, have become lifesaving breakthroughs for thousands of patients. These drugs have had some success in “re-awakening” an immune system that had been sleeping on the job. Many patients have seen tumors melt away faster than an ice cube on a hot summer day. 

These new immunotherapies have been a great first step, but sadly, they still don’t work in the majority of patients. Johns Hopkins University estimates that overall patient response rates to immunotherapy are only between 15 and 20%. 

Compugen, a small biotech headquartered in Israel, is looking to change the game by greatly improving those statistics. Compugen leverages proprietary software and information technology to find new targets, or “pathways,” where cancer can be attacked. They specifically focus on improving immune response to cancer. 

Compugen seeks to discover novel pathways that may respond to new immunotherapies, and then seeks to pioneer the early studies that establish promise for these agents. Then the small company partners with larger, more established Big Pharma companies to complete the commercialization process. This little company is aiming to make big progress in helping your body’s security team remove unruly guests before they can cause serious harm. 

The Compugen Approach 

Although Compugen is a small company with less than one hundred employees, it’s not quite accurate to call it a “start-up.”  $CGEN  started out in life just as an IT operation that only crunched data to look for oncology drug targets. The company’s current leader, Dr. Anat Cohen-Dayag, has actually held various leadership roles at the company for almost two decades.  However, as our understanding of immunotherapy has evolved and grown, so has Compugen. Today the company has at least four active, phase I trials with several different agents; Comugen also has active collaborations with pharmaceutical heavy hitters such as Bayer, Bristol Myers Squibb, AstraZeneca, and Johns Hopkins University. 

The prestigious collaborations and four ongoing trials are solid proof that Compugen’s approach is working. However, anyone who has been in this business long enough knows that phase I is still very early in a drug’s development lifecycle. Only 20% of drugs in phase I ever make it to market. Once they enter the market, the newly approved drugs may, or may not, achieve commercial success. 

The value of $CGEN lies not in the product, but in the platform. Their digital platform has already produced several clinical research programs. You can think of the IT platform as the Goose that Lays the Golden Eggs. Each individual egg is shiny and valuable, but it is the goose herself that should be prized above all. 

Compugen’s digital platform could produce golden eggs at a growing rate. We all know that raw computational power grows at an exponential rate. Some experts believe that our Artificial Intelligence could improve more rapidly in the next ten years than it did in the previous hundred years. Most importantly, the data itself is rapidly improving. Currently thousands of trials related to cancer immunology are being conducted all over the world, producing millions of data points. Data related to human genetics is also exploding in volume. It’s possible that Compugen will crunch more data and get better results in the next two years than it did in the previous twenty years combined. 

The Numbers

So Compugen may well have a bright future ahead of it. But right now, the company still doesn’t make money. Even with a $1 Billion capitalization on the Nasdaq stock exchange, the company could still be considered gestational. 

The business may have to invest for several more years before a chance for positive cash flow exists. The good news is that the company is currently well equipped to do just that. When the $CGEN handed in its latest financial report, the company had burned $7.8 million in one quarter of operations, but still had $133 million on hand. This would mean the firm can conduct  its research and experiments for several years without having any trouble paying its bills. 

These numbers also mean that the company’s pipeline and cost structure justify it’s current $1 billion market capitalization. Remember, statistically speaking, one out of five stage I drugs make it to market. Currently the company has four active phase I trials, with more on the way. That would mean that it’s odds of bringing at least one product to market over the next five years are pretty good. Cancer is big business; a successful agent can easily post annual sales of $1 billion or more. A commercial stage biotech can often trade at 8 times it’s annual sales. So, if just one of Compugen’s drugs makes it to market, and does $1 billion in annual sales, the company could achieve a market capitalization of $8 Billion. That would mean a cool 800% gain for an investor who got in at today’s share price.

Additionally, it should be noted that several of the company’s research products are aimed at increasing the efficacy of already existing best sellers such as Opdivo and Keytruda. These agents are already very well established pillars of oncology, even though they work less than 50% of the time. Any agent found to substantially increase efficacy of a drug that already sells billions could also sell billions. If one of Compugen’s new pathways is found to boost the efficacy of Opdivo or Keytruda, the company could trade for much more than $8 billion almost overnight. 

Apparently other investors have also found these numbers to be appealing. The firm’s largest shareholder, owning almost 30% of the outstanding shares, is Ark Invest. Ark Invest has received oceans of media attention and adulation of late for the stellar returns that they have delivered for their investors. Cathy Wood, the leader of Ark Invest, is a media darling well known for aggressive forward thinking regarding technological breakthroughs. She’s betting big that Compugen represents one of those breakthroughs. 

Compugen is an example of a biotech pioneer that could be a great investment for a patient investor with a stomach for risk. This upstart company is utilizing the latest 21st century technology to evict an intruder who has been unwelcome in the human body for milenia. The stakes are high, both for investors and the human race.

 

Note: The Sick Economist owns shares in $CGEN

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MESOBLAST LIMITED: IS STEMCELL THERAPY READY FOR PRIME TIME?

Mesoblast, MESO, is an Australian based biopharmaceutical company that has been a market favorite, even though the company’s ups and downs have confused many investors.

The MESO share price has been inconsistent lately. This has prompted many investors to ask why. Analyzed carefully, MESO has done better than many stem cell businesses. Most stem cell businesses fail to ever make a profit and fail to even get a product to market. This can cause long-term problems with the stock price of any company.

By Michael A. Mannon, MS

 

Mesoblast is a dynamic and competitive biopharmaceutical company.

Mesoblast as a company is committed to offering groundbreaking cellular therapies for the treatment of many severe diseases using Mesenchymal Stem Cells. They are dedicated to cellular medicines and leveraging their stem cell technology. There are not many successful companies in this niche.  

Adult stem cells are undifferentiated cells that divide and rebuild the damaged tissue. Mesenchymal Stem Cells are a type of adult stem cells generated from some of the adult tissues present in the body. 

Stem cells have been found by scientists to have two properties: self-renewal and the potential to divide into specialized cell types. Multi-potent, mesenchymal stem cells are found to be present in many adult tissues. The bone marrow is considered by many scientists to be the most usable reservoir of adult human stem cells. 

For several disorders, such as heart failure, the capacity to rebuild tissue may be groundbreaking for treatment. And this has been the inspiration for many companies exploring stem cell therapies. 

However, what differentiates Mesoblast from other stem cell companies is its approach to treating inflammatory diseases. Their products have the potential to make breakthroughs a reality for many diseases. 

The company has developed and manufactured its own patented mesenchymal lineage cells to be used for a range of ailments. These have a potential for the regeneration of tissues. These cells, however, secrete a number of biomolecules which can help the body heal more than just tissue damage. They may be important to supporting immune responses needed for recovery in many diseases. 

Possible rejection of the patient’s immune system is the biggest problem with the use of stem cell therapies in heart diseases and other diseases. This can worsen many illnesses. 

MESO does appear committed to the quality of its product. For MESO it is a question of the effectiveness and safety of their products. It’s a long and winding road to provide adequate scientific proof when presenting breakthrough treatments to regulators. Many less reputable organizations have touted stem cells without doing the necessary scientific investigation or seeking the necessary regulatory approval. Mesoblast is trying to do things the right way. Committing to doing science the right way leads to a lot of inevitable ups and downs. This raises financial speculation and can lead to wild fluctuations in the stock price of any company. 

A further significant advantage of some of Mesoblast’s products is that they apparently can be administered to patients without needing donor matching. This increases their viability. Moreover, it allows for a wide spectrum of patients to be treated from their products. This gives them an advantage in comparison with other firms and should potentially allow them to increasingly gain a larger market share. 

 

The Mesoblast pipeline is comparable to no other stem cell business.

Of great interest to investors include the many clinical trial phase 3 products that Mesoblast has in its pipeline. These include MPC-06-ID, Remestemcel-L, and REVASCOR. 

Remestemcel-L is a Mesoblast therapy that may theoretically have properties to help with the treatment of ventilator-dependent patients with COVID-19 patients. However, a clinical trial reported some concerns with the therapy meeting its primary endpoint. And it sent the stock down in December 2020. Obviously, there is a large demand for the treatment of complications linked to Covid-19, so this bad news disappointed investors. 

However, another therapy has shown promise in the DREAM-HF Phase 3 for patients with chronic heart failure. Although the Revasacor did not stop heart failure, it did seem to deliver dramatic reductions in heart attacks and other negative cardiovascular events that plague heart failure patients. 

Heart failure is a pathology that involves one’s heart having trouble pumping. The condition impacts millions of people worldwide. In order to feed and maintain it working, the heart muscle depends on a continuous supply of oxygen rich blood. Having stem cell therapies is highly desirable to treat cardiovascular diseases. Hopefully, many Cardiovascular disorders can be treated with stem cell therapies in the future.

Other conditions such as hypertension and Coronary artery disease can help lead to heart failure. According to the Mayo Clinic, heart failure can cause significant health complications and lead to Liver and Kidney damage in patients. 

Some scientists believe that Mesenchymal Stem Cells when used to treat cardiovascular diseases can preserve the myocardium by reducing the intensity of inflammation and supporting angiogenesis. Angiogenesis is a mechanism used by the body to create new blood vessels. Their low immunogenicity once more makes them a perfect treatment. This helps ensure that the immune system of the patient does not produce a negative response to the therapy. This theoretically can give stem cell therapies an advantage over some protein-based treatments that are easily recognized by the patient’s immune system.  

This product could be a major development for Mesoblast moving forward, although further analysis and testing is still needed. 

Stem cell therapies are not without experimental and medical challenges. For example, there are concerns with the ability of stem cell migration to tissues that require regeneration. There may also be cases whereby stem cells are divided into unintended cells. There may also be difficulties with the manufacturing and culturing of stem cells. Identification of Mesenchymal stem cells in cell populations can be problematic. From a scientific point of view, bone marrow derived Mesenchymal Stem Cells are known to be the best source for obtaining these cells in the human body.

Mesoblast has a wide range of advanced research programs related to different stem cell therapies. MPC-06-ID could potentially be a viable therapy for treating chronic low back pain attributable to degenerative disc disease. 

These are products that consumers should be thrilled about. 

The company has solid financials for a stem cell company and has a lot of cash on hand. The stock had a market cap of over 2 billion on 9/30/2020 and a 52-week high of 21.28. Lately the news surrounding the company’s clinical trials has been a potpourri of both good and bad, so the share price has settled at around $9. It has a float of 93.7 million shares.

Mesoblast is a really exciting healthcare business. The business has made a commitment for the future. And it should be a stock that investors continue to follow. 

 

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GALÁPAGOS NV: OPPORTUNITY THROUGH ADVERSITY?

Heading into the summer of 2020, things looked promising for Galápagos NV. In early June, the Belgian biotech and its partner, Gilead Sciences , announced the results of their phase III clinical trial for filgotinib , a JAK1 inhibitor designed to treat patients with moderate to severely active rheumatoid arthritis (RA). According to the study , “The data demonstrate sustained efficacy and a consistent safety profile with up to 52 weeks of filgotinib across RA populations.” Despite these positive indications, Gilead Sciences received a complete response letter (CRL) from the United States Food and Drug Administration (FDA) specifying that filgotinib was not ready for approval. After publicizing this disappointing news, Galápagos’ stock immediately (NASDAQ: GLPG ) took a massive hit and has been on the decline ever since. With the stock currently trading at around $100 compared to nearly $275 in February of 2020, many investors see Galápagos as a value stock and are hoping to buy low and sell high. But, is this really a good strategy? Keep reading to find out…

By: Matthew Rojas, Biotech Financial Analyst

 

What went wrong?

Approving a new drug in the United States is an extraordinarily difficult feat. According to MedicineNet, only five in 5,000 drugs that enter preclinical testing in the United States make it to human testing; furthermore, only one of those five drugs will ultimately receive approval. The entire FDA drug approval process takes an average of 12 years to complete — it is both costly (about $1 billion) and eats into the drug’s patent life of 20 years.

Filgotinib making it through phase III clinical trials with seemingly positive results and then missing the FDA approval may seem like a unique circumstance… but it is not. Unfortunately, for many pharmaceutical companies, collapsing inches away from the finish line is the harsh reality. In the case of filgotinib, there were two issues that the FDA outlined in the CRL that prevented approval.

The first issue that the FDA raised dealt with filgotinib’s incomplete MATNA and MATNA-RAy studies. These studies were designed to evaluate the impact of filgotinib on the sperm parameters in adult males; however, Galápagos and Gilead incorrectly predicted that they could receive approval without them. Both of these trials are fully recruited with topline results expected during the first half of 2021. The FDA also “expressed concerns regarding the overall benefit/risk profile of the filgotinib 200 mg dose.” For these reasons, Galápagos and Gilead have decided not to pursue approval for filgotinib in the RA indication. Meanwhile, competitors like Abbvie’s JAK1 inhibitor for RA, Rinvoq, are stealing the market share with sales of $149 million in the second quarter of 2020. 

It is important to note that Galápagos and Gilead did receive approval for filgotinib in the EU and Japan for the RA indication. The companies have also filed for approval in the EU for filgotinib in the ulcerative colitis indication, and they are currently waiting to hear back from the health authorities. Regardless, filgotinib not receiving FDA approval in the United States represents a major missed opportunity in terms of revenue for Galápagos. On a separate note, ongoing clinical trials in the United States evaluating the efficacy and safety of filgotinib in other indications such as Crohn’s disease and ulcerative colitis remain intact. Therefore, filgotinib is not a lost cause.

Snapshot of 2020 Financials (in thousands of €):

We are still awaiting Galápagos’ 2020 10-K report, but the company has released its financials for the third quarter of 2020. Taking a look at the income statement, Galápagos generated about €130,000 in top-line revenue compared to about €630,000 in the third quarter of 2019 — a decrease of about 80%. According to analysts at Jefferies, filgotinib had a two to three billion dollar market opportunity if approved in the United States. So, this decrease in revenue is not a surprise considering that Galapágos did not receive approval for filgotinib in the summer of 2020. Because the company is still investing heavily in research and development and has to cover its various operating expenses, Galápagos ended the third quarter of 2020 with a loss of slightly more than €80,000; in the third quarter of 2019, the company turned a large profit of about €360,000.

While Galápagos’ income statement looks significantly worse than last year, the balance sheet is more reassuring. For example, the company still has over €2,000,000 in cash and cash equivalents, which puts it in a strong position to overcome the failure of filgotinib in the RA indication. Furthermore, the company’s current ratio is a strong 9.07, indicating that it has more than enough cash to cover its short-term debt obligations. A current ratio of one or greater is considered ideal.

Overall, Galápagos’ financials are much weaker compared to 2019; however, the company still has a significant cash balance to keep it afloat as it navigates through these difficult times.

What’s next for Galápagos?

Just as diversifying investments in the stock market mitigates risk, diversifying clinical pipelines creates a safety net should studies not go as planned. Fortunately, Galápagos has a diverse clinical pipeline to offset potential issues such as the failure of filgotinib in the RA indication. Right behind filgotinib, Galápagos has another inhibitor in phase III clinical trials for idiopathic pulmonary fibrosis, ziritaxestat. The company is expecting futility results for the phase III trial to arrive in 2021. A futility clinical trial contains a smaller subset of patients that provide a first look into the safety and efficacy of a drug. The results of this trial will provide Galápagos with the necessary information to determine if continuing with a broader phase III study is worthwhile. Additionally, in September of 2020, the company reported positive topline results for a phase II study of ziritaxestat for a different indication, systemic sclerosis.

Ziritaxestat along with the ongoing clinical trials for filgotinib in the various indications other than RA mentioned above provide Galápagos with several potential opportunities in the future.

Buy, sell, or hold?

Galápagos and Gilead missed a multibillion-dollar opportunity by failing to achieve approval for filgotinib in the RA indication from the FDA. For this reason, the stock price has fallen by a whopping 63% compared to last year. However, in my opinion, Galápagos’ stock is undervalued given all of the studies for filgotinib and idiopathic pulmonary fibrosis in process. With this information in mind, I would recommend investing in Galápagos; nevertheless, I caution investors that they should not expect returns in the near future. Creating a drug is a grueling, lengthy process with much potential for failure. Although the company has many phase III trials ongoing, it may still be several years before it receives approval for one of its inhibitors in the United States. Regardless, I do expect Galápagos’ stock price to increase from the current value of about $100 because of its diverse clinical pipeline.

 

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TRANSPARENCY IN HEALTHCARE PRICING: WHAT YOU NEED TO KNOW IN 2021

Twelve years after the beginning of a process referred to as “healthcare reform,” few patients today feel empowered to shop for their own healthcare as if they were purchasing any other service. While the Affordable Care Act has increased healthcare access for many, almost no one would describe today’s healthcare as “affordable.” 

While our nation waits to see what changes a new occupant in the White House may bring to the healthcare scene, most Americans would agree that now is always the right time for us to begin looking out for ourselves. In my internet travels, I may just have discovered a new website that seeks to provide patients with the clarity and education that they need to protect themselves from some of the more abusive elements of our Society. Are you tired of healthcare costs making you sick? Then study the information below…

-The Sick Economist

 

A Glimpse into the World of Healthcare Pricing
By Joanne Rodrigues
Founder, clinicpricecheck.com

 

On a cold day in October, my daughter woke up with a 102 degree fever. Worried that she might have the flu, I rushed her to the urgent care clinic. Thankfully, she didn’t have the flu. I thought the visit might be at most $100 or $200 dollars out-of-pocket, but with my high deductible health plan it turned out to be $1,200. The flu test alone was $800. If I had gone to a drugstore, it would have only cost $60. But the real kicker is that in comparison to what Medicare patients pay – $16 – for a flu test, the only prices related to costs in the system, I paid 50x’s more. And this is not uncommon, consumers lose $108 billion dollars in savings every year because of high hospital markups. Why? It’s due to the pervasive lack of transparency in healthcare, the inability to compare price between providers, and the fact that patients pay vastly different amounts for the same service. 

My background is as a health technology data scientist and my mission is to help every consumer pay the Medicare reimbursement rate or as close to the Medicare reimbursement rate as possible. I built Clinic Price Check and the auxiliary suite of tools (financial assistance, cash-pay, emergency pricing, hospital quality) to help consumers find the lowest costs for health services. I rely on data from the recent Centers for Medicare and Medicaid Services (CMS) transparency price changes to help consumer’s find affordable health providers.  

To understand what’s happening with healthcare pricing, we need to understand how it works. Healthcare providers have ‘sticker prices’ for each itemized health service offered by the provider on an internal Chargemaster or pricing list. This is similar to the ‘sticker prices’ on cars at dealerships. Usually, no one pays the sticker price for a health service and often there are large markups baked-in. The sticker prices are completely unrelated to the cost of providing the service and are intentionally very high to allow for greater leverage in negotiations with insurers. The lowest hospital mark-ups are in Maryland where the state government sets hospital prices and caps hospital spending. The highest markups are in the most populous states such as California, New York, Florida and Texas. 

Different payor groups can pay vastly different amounts. A payor could be an insurance company, a governmental agency, yourself, or some combination of these groups. In economics, this wide disparity between what different organizations pay is called facto price discrimination (or “cost-shifting” in the healthcare academic literature).

When hospital costs are highly marked-up similar to car buying, the question is not what is the price for the service, but how good of a discount can you get? 

Generally, insurer and hospital negotiations start at a discount of about 30% off these Chargemaster prices. This is rarely a good discount, especially in more populous states where Chargemaster prices are often 3-10 times the rate at which Medicare reimburses providers for this same service. In California, the average markup is about 4.5 times the Medicare reimbursement rate.

If you want to get a sense of a good discount rate at a health provider, compare your insurer discount to your health provider’s amounts generally billed (AGB). The AGB is the average reimbursement rate for all services from all payers, including large government payors. For instance, suppose a hospital’s AGB is 47% (a 53% discount on average to all payers), the cash discount (or self-pay when you opt-out of insurance) is 60% and your insurer negotiated discount is 30%. This would mean that the cash discount is greater than what the average payor would get (but still could be higher than the Medicare reimbursement rate) and your insurer negotiated discount is higher than the AGB, meaning other payors are paying substantially less. 

Cash-pay rates at hospitals vary widely. About 10-20% of U.S. hospital’s offer excellent cash-pay rates close to, if not equivalent to the Medicare rate. Check out cash-pay discounts near you here. Coastal states and large cities are more likely to have hospitals that offer cash-pay rates at or near the Medicare Reimbursement rates. States like New Jersey and Illinois also cap uninsured patient costs to 1.15-1.35 times the Medicare Reimbursement rate up to 500% and 600% of the Federal Poverty Line respectively.

Hospitals also offer financial assistance, which is generally the best discount. The income cutoff for financial assistance for many hospitals is at 400% of the Federal Poverty Line, which is $105,000 for a family of four. Many financial assistance policies also cover the insured. About 35% of hospital financial assistance policies have no asset requirement, meaning that they will only look at your income when making this determination. Financial assistance is capped for all providers at the AGB, meaning if you qualify for financial assistance, you’ll never pay more than the AGB and often you’ll pay substantially less. Check out financial assistance income qualification near you here.

To recap, when comparing health providers, it’s good to have one baseline in mind, the Medicare reimbursement rate for the service. Essentially, how close you are to the Medicare reimbursement rate, determines how good a deal you got. Medicare reimbursement rates can be found on Clinic Price Check and they can also be found on the CMS website here.

We’re about to get even more transparent hospital pricing. As of January 1st, 2021, the latest price transparency rule requires provider’s make public the insurers negotiate prices for their top 300 ‘shoppable’ services. A core problem will be compliance with this new rule as many providers may just choose to pay the minimal fine and not post prices. We will launch a new web and mobile tool which will allow you to compare your insurer negotiated discount with cash-pay discount and Medicare rate discount at all health providers who comply with this new transparency mandate. 

 

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